South Africa’s economic fortune may once have been built on gold, but nowadays an ill-timed investment in the metal might just lead to economic ruin.
Gold-board shares have recently become among the most volatile of choices, a victim of an erratic international gold price. But there are believers who claim there is money to be made in gold counters.
Portfolio managers say because gold mining companies’ returns are ultimately locked into the gold price, their shares trade in line with the price of the metal. This means one should buy shares when the price is low and sell when it’s high.
According to one portfolio manager, his company has adopted a simple philosophy when it comes to investing in gold. “We trade our shares according to a range in the gold price. When the gold price falls to about $280 to $290 an ounce, we buy gold shares. When it reaches a level of about $310 to $315, we sell.”
He says the metal is unlikely to trade outside this band for sustainable periods, held in check by the prospects of the European central banks dumping their gold on to the market. Any increase in the gold price above the $315 level will see gold mines selling their gold forward (selling future gold production at a fixed price). “Ultimately that means more gold in the market … which lowers the gold price.”
Of course, you also have to decide which company would be the best choice. According to one portfolio manager, the key factors affecting a gold mining company’s shares are management and strategic thinking. He cited Anglogold and Goldfields as good buys with solid management.
The only disadvantage to these shares, says another portfolio manager, is that they are a little “boring”. Because of their built-in relative stability, their share prices do no always fluctuate as wildly as those of other companies when the gold price rises and falls, leaving less opportunity for large gains.
Anglogold is currently trading at about R240, compared with an annual high of R283 in April and a R149 low in December. Goldfields is hovering around R27,50, having reached its annual high of R39,55, in April, against a R22 low in March.
Cited as good “growth” stocks are Harmony and Kalgold. Harmony is currently at R23, having reached a R30,50 high in April and a R9 low in January.
While one analyst identified Avgold as a good buy because of its gearing potential (its ability to benefit from a rise in the gold price), another said it should probably be avoided.
“The house has a project called `target’, which foresees the creation of a new mine, but it doesn’t really have the funds [R500- million to R1-billion] available to realise this.”